By Ole S Hansen, Head of Commodity Strategy at Saxo
 Ole Hansen |
The grain sector remains under pressure from improved crop weather in Brazil, adding to the risk of a large carryout this summer after recent stock upgrades saw soybean futures drop to their lowest level in more than two years and corn futures set a three-year low.
The industrial metal sector, meanwhile, has been struggling amid weak economic data coming out of China and the government holding off from implementing major stimulus despite the deepening property crisis and consumers holding back on spending. Precious metals have softened in line with a stronger dollar and bond yields moving higher after stronger than expected US economic data raised doubts about the timing of the first rate cut. In addition, we saw comments from central bankers in the US and Europe push back against market views on how quickly rates might ease.
Crude oil rangebound despite cold weather boost and Middle East risks
The energy sector continues to trade within a relatively narrow range with rising concerns about the stability in the Middle East where Houthis continue to send waves of Iranian-produced missiles and drone strikes on ships in the Red Sea while the US military launched multiple airstrikes against targets in Yemen. A deeper involvement by Iran this past week added to worries that the conflict, albeit highly unlikely, may end up impacting the flow of oil and gas from key Middle Eastern producers. Also supporting crude, and especially fuel prices this past week, was a severe cold snap in the US which sent demand sharply higher while temporarily cutting production of oil and gas due to freeze-offs – when low temperatures freeze wells and other equipment. The cold ‘bomb’ also triggered record demand for natural gas, the fuel of choice for power generators over coal as prices remain relatively low.
Overall, we see Brent crude oil remain rangebound around $80 per barrel during the first quarter with the very weak positioning, OPEC+ production restraint, and incoming rate cuts potentially leaving the risk/reward skewed slightly to the upside. The biggest downside risk is a disunited OPEC+ leading to a collapse in the current agreement to keep production down, and the upside from a major geopolitical event disrupting the flow of crude oil and gas from the Middle East.
Soft commodities extend last year’s strong gains
Finally, the softs sector – last year’s best performing sector – saw a renewed surge, led by sugar, cotton and coffee, especially the Robusta variety which raced to a record $3175 per ton. Primarily produced in Vietnam, the bean has seen low levels of exchange-monitored stocks being made worse by farmers in Vietnam holding back parts of a shrinking production in anticipation of even higher prices. In addition, the Red Sea turmoil that’s impacting shipping routes from Asia to Europe has also hit the market for Robusta beans with buyers shunning purchases from Asia due to surging shipping costs and longer-than-normal travel routes. Buyers have instead been trying to secure more supplies from Brazil, highlighting how the normal flow of goods around the world has once again been upended.
The relentless rise in global container freight rates continue with the Drewry composite showing a weekly rise of 23% to $3,777 per 40 ft box, a 173% increase since late Nov, with the most recent gains being led by +35% increases on routes from China to New York and Los Angeles. Since the Red Sea crisis began in early December the cost of shipping a container from the Shanghai to Europe through the Red Sea to the Suez Canal has jumped by more than 300%, raising the cost to consumers while delaying the arrival of goods.
Industrial metals and miners troubled start to 2024
Industrial metals have posted a weak start to the year as the outlook for global manufacturing and construction remains under scrutiny, for now more than offsetting calls for stronger stimulus measures in China, and the potential positive impact of restocking once an expected series of rate cuts from major central banks begin later this year. The Bloomberg Industrial Metal index trades down 5% on the month with losses being led by aluminum and zinc.
Copper prices, meanwhile, remains mostly rangebound as China and rest of the world demand worries continue to be offset by miners cutting their production forecasts driven by, among others, declining ore quality, water restrictions and increased scrutiny of new permits. The combination of supply worries together with a strong push towards electrification, not least in China, continue to provide support in the short term. However, to see a sustained rally towards a fresh record high, the market will need answers to the questions about the timing of and depth of future US rate cuts. Only then may we see renewed restocking by companies that offloaded metals last year amid the rising cost of financing their stockpiles.
Mining companies, meanwhile continue their struggle to control costs towards labor, fuel, and materials during a time when rising interest rates and inflation have added to the overall cost of funding and running a business which increasingly has been struggling with harder-to-mine deposits and lower ore grades. Increased Environmental, Social, and Corporate Governance (ESG) scrutiny by investors, rising regulatory costs and government intervention have also been weighing. These developments have all helped drive the sector lower with the shown example, the Vaneck Global Mining ETF, trading down 10% this month and 15% during the past year.
All the major miners, except those operating in the uranium business, trade lower on the month, led by Newmont and Barrick Gold Corp. Earlier in the week, Barrick’s stock plunged the most since August 2020 after the Canadian miner reported higher costs and lower-than-expected gold sales for its last quarter. These developments, together with expectations for rising demand in the coming years for precious metals as funding costs come down, and most importantly for green transformation metals as the electrification of the world gathers momentum, basically mean that higher commodity prices will be needed to incentivize higher production. Until such time, the mining industry may struggle to deliver the returns, making the sector attractive from an investment perspective.
As mentioned, the exception to this is the uranium mining industry, which has seen the price of its product surge higher in recent months amid a tightening market driven by increased demand, not only from utilities, but also increasingly from funds investing in physical uranium and oxides. An example being Cameco Corp in Canada which trades up 10% on the month and nearly 90% over the past year.
Gold’s current dollar and economic data fixation
The precious metals sector trades down on the month with gold and silver both stuck in ranges while speculation continues about the timing, pace and depth of future US and EU rate cuts. Until the first cut is delivered, the market may at times run ahead of itself, in the process building up rate cut expectations to levels that leave prices vulnerable to a correction, like to one we saw during the week when gold almost touched $2000. With that in mind, the short-term direction of gold and silver will continue to be dictated by incoming economic data and their impact on the timing and pace of future rate cuts. Gold’s weakness this past week was initially driven by the stronger dollar but after once again finding support, the yellow metal saw fresh buying interest, potentially helped along by a small geopolitical risk premium being added to the price.
Recently, Saxo’s strategy team released their Q1 2024 outlook titled “What happened to the future?”. In the commodities section, we outlined the reasons why we believe 2024 could become the “Year of the metals” with focus on gold, silver, platinum and copper. In precious metals, we believe the prospect for lower real yields and lower funding costs as central bank rate cuts will drive a revival in demand from interest rate-sensitive investors. Adding to these developments a fragmented world supporting continued demand from central banks and haven demand from others, the potential for a fresh record remains on the cards.
